1. Day 3: Monetary Regimes For Commodity-Producing Developing Countries Jeffrey Frankel Harvard University & NBER Monetary Policy & Commodity Prices Study Center Gerzensee 23-25 June, 2014

2. The Choice of Monetary Regimes for Emerging Markets / Developing Countries I.How are DCs structurally different from Advanced Economies? II.Choice of exchange rate regime III.Alternative anchors for monetary policy -- Proposal for Nominal GDP Targeting

3. I. How are EMs & Developing Countries different from Advanced Economies? 1.Need for monetary credibility. 2.Supply shocks. 3.Terms of trade shocks.

4. How are EMs different from Advanced Economies? continued 1.Monetary policy-makers have more need for credibility a) due to high-inflation histories, b) absence of credible institutions, c) or political pressure to monetize big budget deficits. A. Fraga, I. Goldfajn & A. Minella (2003), “Inflation Targeting in Emerging Market Economies,” NBER Macro Annual 2003, K.Rogoff & M.Gertler, eds. (MIT Press).

5. 2.The economy is more exposed to supply shocks a) such as natural disasters (hurricanes, cyclones, earthquakes, tsunamis…) b) other weather events (droughts…), c) social unrest (strikes…), d) productivity shocks (“Are we the next Tiger economy?”). 3.And more exposed to terms of trade shocks. a)Volatility in price of export commodity on world markets b)Volatility in price of imports on world markets. How are EMs different from Advanced Economies? continued

6. Trade & Supply Shocks are More Common in Emerging Markets & Low-Income Countries IMF SPRD & World Bank PREM, 2011, “Managing Volatility in Low-Income Countries: The Role and Potential for Contingent Financial Instruments,” approved by R.Moghadam & O.Canuto

7. II. What is the desirable exchange rate regime? Advantages of fixing. Advantages of floating. Which dominate? – Optimum Currency Area criteria – Other criteria Intermediate exchange rate regimes – E.g., systematic managed float.

8. Advantages of fixed rates 1)Encourage trade <= lower exchange risk & lower transaction costs. E.g., Rose (2000): currency unions triple trade among members. 2) Encourage investment <= cut currency premium out of interest rates. 3) Provide nominal anchor for monetary policy Barro-Gordon model of time-consistent inflation-fighting But which anchor? Exchange rate target vs. Alternatives. 4) Avoid competitive depreciation (“currency wars”) 5) Avoid speculative bubbles that afflict floating. (vs. if variability is fundamental real exchange rate risk, it will just pop up in prices instead of nominal exchange rates).

9. Professor Jeffrey Frankel Advantages of floating rates 1. Monetary independence 2. Automatic adjustment to trade shocks 3. Retain seigniorage 4. Retain Lender of Last Resort ability 5. Avoiding crashes that hit pegged rates. (This is an advantage especially if origin of speculative attacks is multiple equilibria, not fundamentals.)

10. Which dominate: advantages of fixing or advantages of floating? The answer depends on circumstances. No one exchange rate regime is right for all countries or all times. Traditional criteria for choosing - Optimum Currency Area. Focus is on stabilization of trade balance & business cycle. 1990s criteria for choosing – Focus is on stabilization of financial markets. Additional criteria relevant for developing countries - -- Financial development -- Terms of trade volatility.

11. Professor Jeffrey Frankel Optimum Currency Area Theory (OCA) Broad definition: An optimum currency area is a region that should have its own currency and own monetary policy. This definition can be given more content: An OCA can be defined as: a region that is neither so small and open that it would be better off pegging its currency to a neighbor, nor so large that it would be better off splitting into sub-regions with different currencies.

12. Professor Jeffrey Frankel Optimum Currency Area criteria for fixing exchange rate: Small size and openness – because then the advantages of fixing are large. Symmetry of shocks – because then giving up monetary independence is a small loss. Labor mobility – because then it is possible to adjust to shocks even without ability to expand money, cut interest rates or devalue. Fiscal transfers in a federal system – because then consumption is cushioned in a downturn.

13. Professor Jeffrey Frankel (i) Level of financial development – Fixed rates are better for countries with low financial development because markets are thin: => costs of financial shocks outweigh benefits of accommodating real shocks. – As financial markets develop, exchange flexibility becomes more attractive. Estimated threshold: Private Credit/GDP > 40%. Aghion, Bacchetta, Ranciere & Rogoff (2005). For richer & more financially developed countries, flexible rates work better: more durable & deliver higher growth without inflation Husain, Mody & Rogoff (2005).

14. Professor Jeffrey Frankel (ii) External Shocks An old wisdom regarding the source of shocks: – Fixed rates work best if shocks are mostly internal demand shocks (especially monetary); – floating rates work best if shocks tend to be real shocks (especially external terms of trade). One case of supply shocks: natural disasters – R.Ramcharan (2007) finds support. Most common case of real shocks: trade

15. Professor Jeffrey Frankel Terms-of-trade volatility Prices of crude oil and other agricultural & mineral commodities spiked in 2008 & 2011. => Favorable terms of trade shocks for some (oil producers, Africa, Latin America, etc.); => Unfavorable terms of trade shock for others (oil importers like Japan, Korea). Textbook theory says a country where trade shocks dominate should accommodate by floating. Confirmed empirically: – Developing countries facing terms of trade shocks do better with flexible exchange rates than fixed exchange rates. – Broda (2004), Edwards & L.Yeyati (2005), Rafiq (2011), and Céspedes & Velasco (2012).

16. 16 Constant term not reported. (t-statistics in parentheses.) ** Statistically significant at 5% level. Across 107 major commodity boom-bust cycles, output loss is bigger, the bigger is the commodity price change & the less is exchange rate flexibility. Céspedes & Velasco (Nov. 2012) NBER WP 18569 “Macroeconomic Performance During Commodity Price Booms & Busts”

17. Conclusion: Desirable exchange rate regime  Very small, very open, economies usually find that the advantages of fixing dominate.  Very large countries like US & euroland usually find that the advantages of floating dominate.  Most countries are in between,  particularly middle-sized middle-income countries. Most of these countries should have intermediate exchange rate regimes, – neither firm fixing nor free floating. – Intermediate regimes include band & basket arrangements.

18. Distribution of EM exchange rate regimes Atish Ghosh, Jonathan Ostry & Mahvash Qureshi, 2013, “Exchange Rate Management and Crisis Susceptibility: A Reassessment,” IMF ARC, Nov.. The big rise is in the “managed float” category } Distribution of Exchange Rate Regimes in Emerging Markets, 1980-2011 (percent of total)

19. So I reject the Corners Hypothesis.  But Stan Fischer has a good point: giving speculators a target to shoot at is often a losing proposition, such as the boundary of a declared band. A particular intermediate regime could be useful, a systematic managed float.

20. A systematic managed float Proposed rule: for every 1% of Exchange Market Pressure, the central bank takes x % as appreciation of the currency & (1-x) % as an increase in reserves (relative to the monetary base). – This arrangement, though rather obvious, has seldom been formalized. – The parameter x calibrates exchange rate flexibility, and can range from 0 (fixing) to close to 1 (full flexibility). – Thus one can have ½ monetary independence + ½ exchange rate stability.

21. refutes the corners hypothesis, – but without capital controls, – without violating the Impossible Trinity, – and even without giving speculators a line to shoot at.  ≈ what some central banks do anyway.  Attempts at econometric estimation  G.Adler & C.Tovar, 2011, “Foreign Exchange Intervention: A Shield Against Appreciation Winds?” IMF WP 11/165.  J.Frankel & D, Xie, 2010, “Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes,” AER. Systematic managed floating

22. Systematic managed float (“leaning against the wind”): Kaushik Basu & Aristomene Varoudakis, Policy RWP 6469, World Bank, 2013, “How to Move the Exchange Rate If You Must: The Diverse Practice of Foreign Exchange Intervention by Central Banks and a Proposal for Doing it Better” May, p. 14 Turkey’s central bank buys lira when it depreciates, and sells when it is appreciates.

23. Korea & Singapore took them mostly in the form of reserves, GS Global ECS Research less-managed floating more-managed floating Example: Renewed capital inflows to Asia in 2010 while India & Malaysia took them mostly in the form of currency appreciation. Slope = 1/x

24. Renewed inflows in 2010 in Latin America less-managed floating more-managed floating but as appreciation in Chile & Colombia. were reflected mostly as reserve accumulation in Peru, Source: GS Global ECS Research Slope = 1/x

25. III: If the exchange rate is not to be the anchor for monetary policy, what is? The need for an alternative anchor led many EMs to Inflation Targeting (IT), – after the currency crises of the late 1990s pushed them off exchange rate targets.

26. Professor Jeffrey Frankel Fashions in international currency policy 1980-82: Monetarism (target the money supply) 1984-1997: Fixed exchange rates (incl. currency boards) 1993-2001: The corners hypothesis 1998-2008: Inflation targeting (+ currency float) became the new conventional wisdom Among academic economists among central bankers and at the IMF. IT was in many ways successful.

27. Drawbacks to IT have been revealed since 2008, – analogously to how the currency crashes of the 1990s revealed the drawbacks of exchange rate targets. Two problems with IT: – Neglect of asset bubbles – Neglect of supply & trade shocks.

28. If the exchange rate is not to be the monetary anchor, what is? Cont. IT’s neglect of supply & trade shocks. Remember the textbook maxim: the exchange rate should accommodate terms of trade shocks. If IT sets the CPI, it doesn’t allow the exchange rate to rise & fall with the terms of trade. When the world price of copper exports falls, a CPI target does not allow the currency to depreciate. When the world price of imported oil rises, a literal CPI target says to tighten monetary policy enough to appreciate the currency, = the opposite of accommodating the adverse trade shock.

29. Nominal GDP Targeting NGDPT is more robust with respect to supply shocks & terms of trade shocks, – compared to the alternatives of IT or exchange rate targets. – And more robust with respect to velocity shocks, compared to M targets. The logic holds whether the immediate aim is – disinflation (as in 1980s, and again today among many EMs & developing countries); – monetary stimulus (as among big Advanced Cs recently); – or just staying the course.

30. Figure 2: When a Nominal GDP Target Delivers a Better Outcome than IT Supply shock is split between output & inflation objectives rather than falling exclusively on output as under IT (at B).

31. Figure 3: When IT Delivers a Better Outcome than a Nominal GDP Target …if the Aggregate Supply curve is steep (b is low, relative to a, the weight on the price stability objective)

32. NGDPT for Developing Countries The proponents of Nominal GDP Targets have focused on the biggest countries. But middle-size, middle-income countries are better candidates. Why? They suffer bigger supply shocks & trade shocks. Evidence suggests that the AS curve is indeed sufficiently steep so that NGDPT minimizes quadratic loss function, – for the cases of Kazakhstan and India: – “Nominal GDP Targeting for Middle-Income Countries,” June 2014 for Central Bank Review, of CB R Turkey. Recommendation: EM/DCs should consider NGDPT as a serious alternative to IT & exchange rate targeting.

33. Mathematical analysis: Which regime best achieves objectives of price stability and output stability? The goal is to minimize a quadratic loss function:. where p ≡ the inflation rate, y ≡ the log of real output, ≡ the preferred level of output; a ≡ the weight assigned to the price stability objective.

34. . Which regime best achieves objectives of price & output stability? continued

35. But different rules => different outcomes, when shocks hit Rogoff (1985) & Fischer (1990). IT & NGDPT both neutralize AD shocks so far as possible. That leaves AS shocks, u. NGDP rule dominates IT, if… a < (2 + b)b; Example 1: holds if b> a (AS flat, vs. loss function lines). Example 2: holds if a = 1 (as in Taylor rule) and AS slope 1/b < 2.414. Under these conditions, the economy looks more like Figure 2 than like Figure 3: – If inflation were not allowed to rise in response to an AS shock, the resulting loss in GDP could be severe => NGDPT dominates IT.

36. For Kazakhstan, an oil exporter, over the period 1993-2012: the estimated AS slope is 1.66 and statistically < 2.41. For India, an oil importer, over the period 1996-2013: – AS slope at the 1-year horizon ranges from.38 to.67. – Each estimate of the slope coefficient is not only > 0 statistically, but significantly < 2.41. – Here the annual monsoon rain is one important supply shock. Thus under the assumptions we have made, it is estimated that Nominal GDP Targeting dominates Inflation Targeting – in terms of achieving the objectives of output & price stability, – at least for these two countries. Frankel, 2013, “Exchange Rate and Monetary Policy for Kazakhstan in Light of Resource Exports,” CID, Harvard. Bhandari & Frankel, 2014, “The Best of Rules and Discretion: A Case for Nominal GDP Targeting in India,” HKS, June.The Best of Rules and Discretion: A Case for Nominal GDP Targeting in India,” Which regime best achieves objectives of price and output stability? continued

37. Estimation of AS curve for Kazakhstan & other oil exporters Country Regression with AD shocks (partner GDP & military spending) as IVs for GDP Period CoefficientSEt-stat 1 Iran-3.295.14-0.641988-2009 2 Saudi Arabia3.331.981.681988-2012 3 Nigeria5.866.820.861988-2012 4 Kazakhstan1.660.752.211993-2012 Regression of inflation against GDP growth, to estimate Aggregate Supply for oil-exporting countries – Table 4, Frankel (2013), thanks to Gulzar Natarajan Note: For some countries, estimated slope did not come out significantly > 0.

38. Estimation of AS curve for India Bhandari & Frankel (2014), Table 1: Estimation of Supply Curve Slope 1 st stage dependent variable: output gap 2 nd stage dependent Variable: inflation surprises ( winarm/ginarm/ginrw) Note: First stage non-IV variables not shown. Memo: List of variables with brief description WINGAP & GINGAP: Annual inflation rate minus expected inflation rate derived from an ARMA model for WPI inflation & GDP deflator respectively GINRW: Annual inflation rate - expected inflation rate derived from random walk assumption OGAP: Output gap. Potential calculated by passing through HP filter Aggregate demand instruments: WG: World annual GDP growth NREG: Dummy variable = 0 when the program had not started and the value of ratio of districts covered when it was operating Aggregate supply shocks: OIL (-2): Terms of trade variable calculated as US$ price of a barrel of oil x USDINR exchange rate, to get the Rupee value of oil; then deflated by WPI inflation index to convert to real terms. Quarterly change in the real value of oil. 2 quarter lag worked best. RAINS: Percentage deviation of monsoon rains from normal. Std. errors in parentheses *** p<0.01, ** p<0.05, * p<0.10

39. Figure 2: When a Nominal GDP Target Delivers a Better Outcome than IT Supply shock is split between output & inflation objectives rather than falling exclusively on output as under IT (at B). Estimates Suggest:

41. Appendix 2: Are Emerging Markets vulnerable to a global financial shock? Appendix 1: Rules vs. discretion

42. Appendix 1: Why constrain monetary policy by a rule? In the dynamic consistency model (Barro-Gordon, 1982) discretion leads to a positive bias in inflation. A credible rule can eliminate that inflation bias.

43. Professor Jeffrey Frankel, Kennedy School of Government, Harvard University Dynamic inconsistency: The Intuition Assume governments, if operating under discretion, choose monetary policy and hence AD so as to maximize a social function of Y & π. – => Economy is at tangency of AS curve & one of the social function’s indifference curves. – Assume also that the social function centers on >, even though this point is unattainable, at least in the long run. Assume W & P setters have rational expectations – => π e (& AS) shifts up if rationally-expected E π shifts up – => π e = E π = π on average. economy is at point B on average. Inflationary bias: π e =E π > 0. Lesson: The authorities can’t raise Y anyway, so they might as well concentrate on price stability at point C.

44. API-120 - Macroeconomic Policy Analysis I Professor Jeffrey Frankel, Harvard University 1. Barro-Gordon innovation: It can be useful to think of society’s 1 st choice as Y= (& π=0), even if it is unattainable. 3. But π e adjusts upward in response to observed π>0. The LR or Rational Expectations equilibrium must feature π e = π. Result: inflationary bias π>0, despite failure to raise Y above. π πeπe 4. The country would be better off “tying the hands” of the central bank. Result: Y = (no worse on average than under discretion), and yet π=0. ● ● ● 2. If π e would stay at 0, then to get the higher Y it would be worth paying the price of π>0.

45. Professor Jeffrey Frankel, Kennedy School of Government, Harvard University TIME-INCONSISTENCY OF NON-INFLATIONARY MONETARY POLICY + Policy-maker minimizes quadratic loss function: where the target. => (Romer 11.53) (11.54 )

46. Professor Jeffrey Frankel, Kennedy School of Government, Harvard University Given discretion, the CB chooses the rate of money growth and inflation (assuming it can hit it) where. Take the mathematical expectation: + Rational expectations: => (10.15), the inflationary bias. (11.58)

47. Professor Jeffrey Frankel, Kennedy School of Government, Harvard University ADDRESSING THE TIME- INCONSISTENCY PROBLEM  How can the CB credibly commit to a low-inflation monetary policy?  Announcing a policy target π = 0 is time-inconsistent, because a CB with discretion will inflate ex post, and everyone knows this ex ante.  CB can eliminate inflationary bias only by establishing non-inflationary credibility,  which requires abandoning the option of discretion.  so public will see the CB can’t inflate even if it wants to.  CB “ties its hands,” as Odysseus did in the Greek myth.

48. Professor Jeffrey Frankel, Kennedy School of Government, Harvard University Addressing the Time-Inconsistency Problem (continued)  Reputation  Delegation. Rogoff (1985): Appoint a CB with high weight on low inflation a′ >> a, and grant it independence. It will expand at only << inflationary bias of discretion.  Binding rules. Commit to rule for a nominal anchor: 1. Price of gold2. Money growth 3. Exchange rate4. Nominal GDP 5. CPI 6. GDP deflator 4.

49. Appendix 2: Are Emerging Markets vulnerable to a global financial shock? Boom-bust cycle in EM capital flows External shocks – “Risk off” – US interest rates Which countries withstand shocks – In 2008-09 and previous crises? – In 2013 US “taper tantrum”?

50. 3 waves of capital flows to Emerging Markets: IIF http://www.iif.com/press/press+406.php late 1970s, ended in the intl. debt crisis of 1982-89; 1990-97, ended in East Asia crisis of 1997-98; and 2003-2008, ended … when?

51. The Joseph cycle Joseph prophesied 7 years of plenty, with abundant harvests from a full Nile -- followed by 7 lean years of drought & famine. The Pharaoh empowered his technocratic official (Joseph) to save grain in the 7 years of plenty, building up sufficient stockpiles to save the Egyptian people from starvation during the bad years. -- a valuable lesson for today’s government officials in industrialized & developing countries alike. 51

52. Biblical cycle, cont.Biblical cycle, cont.Biblical cycle, cont.Biblical cycle, cont. For emerging markets, the first phase of 7 years of plentiful capital flows occurred in 1975-1981, recycling petrodollars as loans to developing countries. recycling petrodollars as loans to developing countries. The international debt crisis that began in Mexico in 1982 was the catalyst for the 7 lean years, known in Latin America as the “lost decade.” The turnaround year, 1989, saw the 1 st Brady bond issue. 52

53. Biblical cycle, cont. The second cycle of 7 fat years was the period of record capital flows to emerging markets in 1990-96. The second cycle of 7 fat years was the period of record capital flows to emerging markets in 1990-96. The 1997 “sudden stop” in East Asia was then followed by 7 years of capital drought. The third cycle of inflows, often identified with “carry trade” & “BRICs” came in 2004-2018 and persisted even through the Global Financial Crisis. If history repeats, it may be time for a 3 rd sudden stop of capital flows to emerging markets! 53

54. When implicit volatility is high (↓ in graph), capital flows to EMs fall: “Risk off” (e.g., 2009 GFC) Kristin Forbes, 2014 http://www.voxeu.org/article/understanding-emerging-market-turmoil http://www.voxeu.org/article/understanding-emerging-market-turmoil Notes: Data on private capital flows from IMF's IFS database, Dec. 2013. Capital flows are private financial flows to emerging markets and developing economies. Volatility index measured by the Chicago Board's VIX or VXO at end of period. 2013 data are estimates. See K.Forbes & F.Warnock (2012), “Capital Flow Waves: Surges, Stops, Flight and Retrenchment”, J. Int.Ec.

55. The role of US monetary policy Low US real interest rates contributed to EM flows in late 1970s, early 1990s, and early 2000s. The Volcker tightening of 1980-82 precipitated the international debt crisis of 1982. The Fed tightening of 1994 helped precipitate the Mexican peso crisis of that year. But the correlation is not always there.

56. The relationship between the Fed’s interest rate and EM capital flows does not always hold. Kristin Forbes, 2014 http://www.voxeu.org/article/understanding-emerging-market-turmoil Notes: Data on private capital flows and policy rates from IMF's IFS database, Dec. 2013 version. Capital flows are private financial flows to emerging markets and developing economies. Policy rates measured at end of period. Data for 2013 are estimates.

57. After Fed “taper talk” in May 2013, capital flows to Emerging Markets reversed again. Powell, Jerome. 2013. “Advanced Economy Monetary Policy and Emerging Market Economies.” Speech at the Federal Reserve Bank of San Francisco Asia Economic Policy Conference, November. http://www.frbsf.org/economic-research/publications/economic-letter/2014/march/federal-reserve-tapering-emerging-markets/

58. 58 When Ben Bernanke warned of tapering QE in May/June 2013, Financial Times US interest rates rose, and EMs fell.

59. Global investors required higher interest rates from EMs after May 2013 Global Economics Weekly: 14/07 - The downside risks to EM growth and their market implications, 2/19/2014

60. Which EM countries are hit the hardest? For past studies of past crises, such as 1997-98, Early Warning Indicators that worked well include: – Foreign exchange reserves especially relative to short-term debt; – Currency overvaluation ; – Current account deficits. E.g., – J. Frankel & A. Rose (1996) "Currency Crashes in Emerging Markets," JIE. – G. Kaminsky, S. Lizondo, & C.Reinhart (1998 ) “Leading Indicators of Currency Crises," IMF Staff Papers. – G. Kaminsky, & C.Reinhart (1999) – J. Frankel & G. Saravelos (2012) “ Are Leading Indicators Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis.” JIE.

61. The variables that show up as the strongest predictors of country crises in the past are: Source: Frankel & Saravelos (2012) (i) reserves and (ii) currency overvaluation

62. Many EM countries learned lessons from the crises of the 1990s, which better-prepared them to withstand the Global Financial Crisis of 2008-09. More-flexible exchange rates Higher reserve holdings Less dollar-denominated debt More local-currency debt More equity & FDI Macro-prudential regulation Fewer Current Account deficits Stronger government budgets

63. Foreign exchange reserves are useful One purpose is dampening appreciation, – thus limiting current account deficits. Another is the precautionary motive. The best predictor of who got hit in the 2008 Global Financial Crisis was reserves – Frankel & Saravelos (2012). – Dominguez & Ito. – This was the same Warning Indicator that also had worked in the most studies of earlier crises.

64. Best and Worst Performing Countries in Global Financial Crisis of 2008-09 -- F&S (2010), Appendix 4

65. Which EM countries were hit the hardest by the “taper tantrum” of May-June 2013? Those with big current account deficits, or with exchange rate overvaluation. Reserves did not seem to help this time. E.g., – B. Eichengreen & P. Gupta (2013) “ Tapering Talk: The Impact of Expectations of Reduced Federal Reserve Security Purchases on Emerging Markets,” Working Paper. – Jon Hill (2014), “Exploring Early Warning Indicators for Financial Crises in 2013 & 2014,” HKS, April.

66. Which EM countries were hit the hardest by the “taper tantrum” of May-June 2013? Or January 2014? Those with big current account deficits, or with exchange rate overvaluation. Reserves did not seem to help this time. E.g., – B. Eichengreen and P. Gupta (2013) “Tapering Talk: The Impact of Expectations of Reduced Federal Reserve Security Purchases on Emerging Markets,” UCB WP. – Jon Hill (2014) “Exploring Early Warning Indicators for Financial Crises in 2013 & 2014,” MPA/ID SYPA, HKS, April.

67. Current account deficits opened up among the “Fragile Five” after 2005 Global Economics Weekly: 14/07 - The downside risks to EM growth and their market implications, 2/19/2014

68. Countries with current account deficits were hit in June 2013. Kristin Forbes, 2014 http://www.voxeu.org/article/understanding-emerging-market-turmoil http://www.voxeu.org/article/understanding-emerging-market-turmoil The “Fragile Five”

69. Countries with high inflation rates were also hit in the year since May 2013. Taper Tantrum or Tedium: How U.S. Interest Rates Affect Financial Markets in Emerging Economies A.KlemmA.Klemm, A.Mei er & S.Sosa, IMF, May 22, 2014A.Mei er S.Sosa

70. Are EMs vulnerable to a new global shock? Conclusion Many EMs learned lessons from the 1980s & 1990s, and by 2008 were in a stronger position to withstand shocks: – More flexible exchange rates – More fx reserves – Less fx-denominated public debt – Stronger budget positions & Stronger current account positions. Some backsliding, 2010-2014: – Weaker budgets – Current account deficits – The return of fx-denominated private debt. A promising direction: macro-prudential regulations – E.g., counter-cyclical loan-to-value ratios for mortgages.